On Short Sales and Land Trusts

Land trusts have long been the method of choice for conducting simultaneous closings on short sales. In essence, they allow investor to buy and sell a property with no money out of pocket.

As such, they have been promoted by real estate gurus for years as the perfect way for one to build their million dollar real estate business without needing a penny (other than to buy their promotional materials).

So why are so many state attorney generals concerned? Using land trusts, particularly the Warranty Deed to Trustee (transferring ownership of the property from the homeowner in default to a trustee who is closely aligned with the investor seeking to make a profit) can become problematic or often illegal in some states.

Likewise, the largest title insurance underwriters recently issued underwriting bulletins to their agents and offices indicating that transactions involving land trusts are to be avoided, or carefully handled.

Years ago when I first learned how to use the land trust, it seemed too good to be true . . . After several successful transactions, I finally found that my suspicions were correct.

Land trusts are used in short sale transactions by investors for these two specific reasons.

Most investors are trying to set up a simultaneous purchase and resale of the property (a simultaneous closing). A problem created when trying to do a simultaneous closing is that most people buying the short sale from the investor are going to go get a loan to buy the property. Just about all lenders providing loans to buyers have a seasoning requirement. Seasoning requirements state that the lender will not loan money on the property unless the homeowner has been on title for at least 6, 12 or 24 months. Land trusts have seemingly provided a perfect foil to this obstacle –– when in fact they are deeply flawed. In using land trusts investors are able to show that the homeowner or seller is still on title when in truth they are not. The land trust is a “smoke and mirrors” tactic used by the short sale investor that allows them to pull all the strings behind the scenes to gain the profits from the transaction. Unfortunately, they are misrepresenting to the end lender the true nature of the transaction. Likewise, investors using the land trust as a method to conduct a simultaneous close are committing actions that border on bank fraud.

Many investors doing short sales have tried to create a “subject to” transaction in which the investor will short sale 2nd and 3rd mortgages (thus creating the equity and future profit). The only way to complete a subject to deal is through using a land trust. The investor would then “take over” the 1st mortgage “subject to” the existing mortgage (thus eliminating the need for the investor to use their own cash or credit to “buy” the property). Laws have been enacted specifically to eliminate this practice.

What’s amazing to me is how many investors are willing to put themselves on the line by ignoring the risks inherent in these type of transactions involving land trusts, when a better way exists.(see strategicrealestatecoach.com)

As short sales have grown more common, more Realtors and investors have migrated over to what was once a niche market. I’m curious . . . how many Realtors have attempted a short sale using a land trust? Also, how many investors are still trying to close deals using land trusts? What have your experiences been? What questions were raised?

I have used Land Trusts on all of my short sales. I have done around 5. I have not had any problem with them. I do get asked by the title companies on occasion about the seasoning issue, but when we first contact the owner we have them sign over the deed so by the time the closing takes place it has been over 90 days. My title company just started making us pay for the first closing instead of having the second cover it, but other than that it has worked very well.

Using options and memorandums of options is much more efficient in the current market environment. It also eliminates some of the seasoning issues as well as the reluctance of title companies to close with Land trust in a simultaneous closing situation

You do need to fully fund the front end transaction but this can be done easily with “dough for a day” companies.

Option is better than land trust. Because of title issue.

I will send the option contracts to anyone who wants them. just PM me your email address and I will email all the docs.